CDR Arbitration Symposium: Reforming the arbitral landscape

Model Law reform, the practicalities of third-party funding, assessing the true value of a claim, rethink...

Model Law reform, the practicalities of third-party funding, assessing the true value of a claim, rethinking investor-state dispute settlement and a masterclass on cybersecurity provided the afternoon’s digest of CDR’s Autumn Arbitration Symposium. Part two of a two-part report.

Before giving the audience an overview of proposed reforms to the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law, Loukas Mistelis of Queen Mary, University of London, took a look back on why these reforms are currently being considered.

Generally, it had not been fully anticipated how the Model Law would have an impact on territoriality and it was never intended for such a broad range of disputes.

Of all of the ice cream flavours in the world, the Model Law is vanilla, said Mistelis, with Jonathon Egerton-Peters, a counsel of Skadden, Arps, Slate, Meagher & Flom, adding that it is states that provide the extra sprinkles by way of domestic arbitration laws.

Turning to the doctrine of negative Kompetenz-Kompetenz, Hannah Ambrose, a senior associate at Herbert Smith Freehills, emphasised the importance of a modern and functioning arbitral system, particularly in jurisdictions where judicial recourse is less efficient.

So, why the need for reform? With positive Kompetenz-Kompetenz a broadly accepted principle, Ambrose argued that negative Kompetenz-Kompetenz, restricting the power of courts, would bring about greater certainty. There is, she added, a natural tendency for judiciaries to assume jurisdiction or at least assess if they have it, without negative Kompetenz-Kompetenz a tribunal’s position on jurisdiction is not protected.

Asking how far Model Law will go to harmonise this area, she said the current divergence of approaches, for example in France, Germany and the United Kingdom, is not a good reason not to tackle the issue, before turning to case law in Switzerland, whose Supreme Court recently ruled on the matter. A takeaway for Mistelis on this topic was that text is one thing, but picking it up in culture is another.

For Egerton-Peters, arbitrability is an area “ripe for reform”, with the current status quo being that if you face an arbitration in a Model Law state, you turn to that state’s domestic arbitration law to see if the dispute is arbitrable – a process which can often lead to delay because of grey areas and disappointments, such as the annulment of awards further down the line.

Historically, UNCITRAL has considered arbitrability a low priority, he added, but the consequences of an annulled award span beyond time and cost – it also means that confidentially is breached if the annulment appears on the radar. As such, parties always tend to choose safer Model Law states where arbitrability is clearer, which has a negative effect on the development of arbitration in developing jurisdictions.

Germany has some of the best arbitrabilty laws (influenced by Switzerland), Mistelis outlined, adding that in Ukraine, only civil law claims can be arbitrated, which raises a lot of questions.

Rather than focus on UNCITRAL’s list of non-arbitrable disputes, a better approach would be to focus on what is arbitrable as clients and practitioners are entitled to expect that disputes can be arbitrated without such interruption, Egerton-Peters concluded.

THIRD-PARTY FUNDING

Stressing the importance of moving away from conceptual ideas of third-party funding to considering it in practice, the next panel, chaired by Stewarts partner Daniel Wilmot, provided views from a funder, law firm users of funding and a barrister.

If a party is considering funding, then they need to know the right questions to ask of a funder, said Mark King, a senior director at Harbour Litigation Funding; namely, what money is available, where does it come from and will it last for the duration of the case?

Parties should expect funds to be “ring-fenced” for their case right to the end of trial, he continued.

The relationship with a funder who knows the process is also very important, King added, particularly as cases can run for years: “You also want to be with a funder who doesn’t freak out when things go wrong,” and you want to be with one that is a member of the Association of Litigation Funders – the industry’s self-regulating body of which Harbour’s Susan Dunnwas recently elected as chair.

A common criticism of funding is that lawyers can often go quite deep into the process of getting a case reviewed, only for a funder to reject it. As such, King gave some practical tips on having the best chance of getting a case approved.

It is important to give a clear pitch of a case – telling the story behind it and not just outlining merits. Funders must identify risk, so having as much background on a case helped with this process, he said.

Knowing the client’s position on settlement is also an important factor, he continued. Some clients really do just want an award or judgment.

As a user of funding, Damian Honey, a partner and head of international arbitration at HFW, said clients can be very concerned about how much influence a funder has on settlement. While settlement may not initially be on a client’s agenda, something could happen along the way, such as a business opportunity, which makes them want to fold.

Ultimately, King and Honey concurred that a funding agreement which provides for a broad spectrum of outcomes is fundamental to both parties.

The client experience, Honey explained, is that they expect funding to be quicker, more informal and cheaper than it actually ends up being, which is why his firm established an internal funding committee which looks at various funding options and providers on a case-by-case basis so that clients expectations can be better managed and met.

Having seen “the good, the bad and the downright ugly” in the use of third-party funding, barrister Charles Raffin of Hardwicke highlighted the importance of good case management and how barristers can add valuable input into the funding relationship, including looking at possible problems and traps and creating a working plan to deal with them.

Legal advisers, he said, should also consider whether to accept responsibility for briefing the funder, as they would with their client, and consider concerns over liability and privilege where they do so.

While funders have a very good eye for under-pitched budgets, they do not like surprises and this is where barristers can give considerable insight on fees and budgeting, he noted, particularly as cost-budgeting is part of the UK’s Civil Procedure Rules.

Other issues identified by the panel were the legality of funding in jurisdictions where enforcement of an funded award is attempted, as well as conflicts of interest and the emerging secondary market where judgments and awards are sold on to other funders.

ASSESSING FINANCIAL RECOVERY

In a panel diligently chaired by David Brynmor Thomas QC of 39 Essex Chambers, who was awarded silk earlier this year, lawyers and experts swapped stories and tips on how to get the best from consulting experts.

“As lawyers, we’re often hardwired to consider damages last,” Debevoise & Plimpton counsel Akima Paul-Lambert said, adding that lawyers sometimes seem to take pride in ignoring the numbers and leaving that up to the accountants; although, the increased use of third-party funders has helped lawyers to look at this earlier into the process.

To tackle this issue, Paul-Lambert came equipped with her own set of ABCs, which she shared with the audience.

A – the arbitration agreement: Agreements, she said, often place insufficient attention in terms of damages so it is good at the drafting stage to account for the different types of damages that may arise.

B – bifurcation: While the traditional view is that bifurcation of liability and damages may save on time and costs, does it narrow down issues around quantum? Quantum and liability issues often intertwine, she said, and that is where bifurcation does not work, so it is good to ask whether it is realistic and optimal.

C – consulting experts: Arbitration counsel can learn from litigation in this respect, Paul-Lambert suggested. Pleadings in arbitrations are often not tested with the gravitas of experts who can provide an early analysis of quantum.

Accountants, said Paul Rathbone of Osterwald Rathbone & Partners, are often instructed to provide a “quick and dirty” report highlighting evidential issues where sometimes evidence is treated like mud that is thrown at a wall to see if it sticks.

Challenging the view that the legal aspect of case needs more certainty than the quantum element, Andrew Maclay of Forensic Risk Alliance said he is a fan of the phrase “reasonable certainty”. There is a level of legal certainty required for adjudication, but a lesser level of certainty needed for quantum. However, “sometimes it’s all left to the accountant” to predict the future, he added.

Evidence is key, he said, if you are claiming on investment costs, then claimants need to be prepared to make documents available to accountants, such as invoices, to support the claim.

In agreement, Marleen Krueger, a senior associate at WilmerHale, stated it is helpful to outline to the tribunal what documents are there and why you need them. Evidence, such as invoices, can often be hidden away in appendices.

“The acronym is ‘garbage-in, garbage-out’,” Paul-Lambert quipped, adding that lawyers have an obligation to collect accurate information from the right custodians.

Parties tend to divide party-appointed experts with tribunal-appointed experts, said Krueger. Parties obviously preferred their own experts, but there are issues, such as independence, where it may be beneficial to rely on experts appointed by the tribunal.

Responding to a question about a tribunal appointing its own third-party expert when it dislikes the approach of the party-appointed experts, Rathbone said this is where it is up to the experts to be strong and stick to the evidence and resist pressure.

Experts, he continued, should divorce themselves from the merits and stick to the supporting evidence. However, the responsibility upon experts can differ jurisdictionally, Maclay added.

REFORMING ISDS

Where the earlier panel had looked into some of the specific issues under consideration by UNCITRAL’s Working Group III which is convening in Vienna this week, this panel looked at some of the broader issues investor-state dispute settlement (ISDS) faces.

Outlining the now widely known and often-cited criticisms of ISDS, Wendy Miles QC, a partner at Debevoise & Plimpton, cited issues around transparency, as well as the “regulatory chill” and the issue of how incredibly expensive investment cases are – a cost incurred by the taxpayer if a state loses.

While criticisms and references were usually confined to treaty claims, and ICSIDand UNCITRAL are approaching reform in similar fashion, many disputes involving states are in fact contractual, Miles said, before turning to other concerns under review by the Working Group, such as the use of third-party funding in investment cases where it is sometimes argued that funders are commoditising the market, albeit they undoubtedly provide access to justice in some cases.

A number of governments have provided submissions to the Working Group which is considering both systematic reform and step-by-step reform, Wilson Antoon of King & Wood Mallesons said. Investment courts are an example of systematic reform, he explained, saying that amid the options under review is the appointment of full-time adjudicators who serve long terms to avoid the prospect of ‘double-hatting’ where they can sit as an arbitrator and as counsel in close proximity – clearly giving rise to conflicts and concerns over impartiality.

It has been suggested that having fewer jurists would lead to more consistency and predictability when it came to awards, but for Miles it is too early to tell if that suggestion has merit, such reform would not have a positive impact on the issue of diversity.

Other examples of step-by-step reform identified by Antoon and discussed among the panel were the prohibition or regulation of third-party funding, the appointment of arbitrators, codes of conduct and disputes avoidance mechanisms.

For Miles, it is “evolution all the way”, warning, however, there is a need to keep evolving. “The ISDS system is not broken, but the edges do need smoothing.”

“We’re witnessing hysteria” rather than reform or transformation, Miles added, while Welsh suggested that solutions might accelerate, saying that standing tribunals will become arguably more judicial than arbitral, with Antoon predicting that an appellate mechanism is more likely happen before any permanent investment court comes about.

CYBERSECURITY

Chaired by Juliet Blanch of Arbitration Chambers, Brandon Malone of Brandon Malone & Company, who is significantly involved in the proposed protocol for cybersecurity in international arbitration due to be finalised in November, kicked off the final panel taking a practical look at some of the cybersecurity risks during the arbitration process, such as hacking and phishing attacks.

Despite the obvious consequences, larger issues span the loss of very large amounts of money and/or sensitive information relating to parties, including governments, as well as revealing the tactics of parties and witnesses.

Reputational damage is also a prime concern, as is the prospect of a contractual breach if a party has not taken reasonable cybersecurity measures, he said, before pointing to regulatory exposure such as breach of the General Data Protection Regulation (GDPR).

Dealing with more than 100 data protection laws is a huge undertaking, said Anneliese Day QC of Fountain Court Chambers, who added that GDPR could well be affected by Brexit.

For institutions, cybersecurity is a big deal, noted Robert Stephen, registrar at the DIFC-LCIA Arbitration Centre in Dubai; something his institution is taking seriously by investing in proper systems and training.

Institutions, he said, hold a lot of money that sits in trust accounts and is distributed once the award is rendered, included that for paying the arbitrators – all of which is prime for a ‘man in the middle’ attack.

Modernisation is important for institutions to remain competitive, he added. However, this should be approached with caution. There is risk of human error with systems that give certain permissions to different people, what if the wrong party is given access to certain information?

More and more arbitrators are thinking about cybersecurity, Day noted, who said it was surprising, however, how reluctant arbitrators are to take the lead or where it is just one party that will not play ball.

Should tribunals or institutions take the lead? Blanch asked, to which Stephen responded that institutions needed to be careful not to interfere with the direction of the tribunal.

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